Tag: stockmarket

How to navigate market risk from interest rates, the economy and politics in 2024

As the U.S. Federal Reserve’s three-year reign in the headlines potentially comes to an end, an analysis of this year’s market themes can offer valuable insights for predicting trends and ensuring attractive returns in 2024.

Beyond the central bank’s actions, pivotal factors shaping the investment landscape this year include fiscal policies, election outcomes, interest rates and earnings prospects.

Throughout 2023, a prominent theme emerged: that equities are influenced by factors beyond monetary policy. That trend is likely to persist.

A decline in interest rates could significantly increase the relative valuations of equities while simultaneously reducing interest expenses, potentially transforming market dynamics. Contrary to consensus estimates, 2023 brought a more robust earnings rebound, leaving analysts optimistic about 2024.

The 2024 U.S. presidential election, meanwhile, introduces a new element of uncertainty with the potential to cast a shadow over the market during much of the coming year.

Choppy trading, modest earnings growth

Anticipating a choppy first half of the year due to sluggish economic growth, we see a better opportunity for cyclicals and small-cap stocks to rebound in the latter part of the year. As uncertainty around the election and recession fears dissipate, a broad rally that includes previously ignored cyclicals and small-caps should help propel the S&P 500
SPX
higher.

Broader macroeconomic conditions support mid-single-digit growth in earnings per share throughout 2024. Factors such as moderate economic expansion, controlled inflation and stable interest rates are expected to provide a conducive environment for companies, enabling them to sustain and potentially improve their earnings performance. We estimate EPS growth of 6.5%. This projected growth aligns with the broader market sentiment indicating a steady upward trajectory in earnings for the upcoming year, fostering investor confidence and supporting valuation expectations across various sectors.

“ If the economy has not been in recession at the time of the first rate cut but enters one within a year, the Dow enters a bear market.”

When it comes to U.S. stock-market performance around rate cuts, the phase of the economic cycle matters. When there has been no recession, lower rates have juiced the markets, with the Dow Jones Industrial Average
DJIA
rallying by an average of 23.8% one year later.

If the economy has not been in recession at the time of the first cut but enters one within a year, the Dow has entered a bear market every time, declining by an average of 4.9% one year later. Our base case is a soft landing, but history shows how critical avoiding recession is for the bull market as the Fed prepares to ease policy.

Big on small-caps

This past year has posed a hurdle for small-cap stocks due to the absence of a driving force. These stocks typically perform better as the economy emerges from a recession. While they are currently undervalued, their earnings growth has been notably lacking. If concerns about a recession diminish, a normal yield curve could serve as a potential catalyst for small-cap stocks.

Growth vs. value

The ongoing outperformance of megacap growth stocks that we saw in 2023 might hinge on their ability to sustain superior earnings growth, validating their current valuations. Defensive sectors in the value category, meanwhile, are notably oversold and might exhibit strong performance, particularly toward the latter part of the first quarter. Should concerns about a recession dissipate, cyclical sectors within the value category could outperform, particularly if broader market conditions turn favorable in the latter half of the year.

Handling uncertainty

The Fed’s enduring influence regarding the prospect of a soft landing in 2024 remains a pivotal point in the market’s focus. Considering the themes of the past year and the multifaceted influences on equities beyond monetary policy, investors are advised to navigate through uncertainties stemming from unintended fiscal shifts, upcoming elections and the impact of fluctuating interest rates. While a potentially choppy start to the year is anticipated, it could create opportunities for cyclical and small-cap stocks later in the year.

Ed Clissold is chief of U.S. strategies at Ned Davis Research.

Also read: Mortgage rates dip after Fed meeting. Freddie Mac expects rates to decline more.

More: After the Fed’s comments, grab these CD rates while you still can

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February 3, 2024
Why Donald Trump is unlikely to get his wish for a 2024 U.S. stock-market crash

Donald Trump is unlikely to get his wish that a U.S. stock-market crash occurs this year.

I’m referring to the former U.S. president’s comments last week that he hopes the market crashes in 2024, since if he is elected in November and takes office a year from now, he doesn’t want to be another Herbert Hoover. Hoover was President when the stock market crashed in 1929.

The stock market did plunge in two of the last four presidential-election years, so it’s understandable why one would worry that 2024 could see a repeat. In 2008, in the middle of the Global Financial Crisis, the S&P 500
SPX
lost 38.5% for the year. In 2020, as the economy ground to a halt because of the COVID-19 pandemic, the S&P 500 lost 34% in little more than a month’s time.

It’s possible that a crash could occur at any time, of course, so a crash this year can’t be ruled out. Nevertheless, the odds of one occurring this year are significantly below average. That’s according to the latest “State Street US Froth Forecasts,” which are derived from research on crashes conducted by Robin Greenwood, Professor of Banking and Finance at Harvard Business School.

In that research, Greenwood and his co-authors found that it’s possible to identify when there is an elevated probability of a crash. In an interview, Greenwood said that “crash probabilities are low” right now, not only for the market as a whole but “across the board” for individual market sectors as well.

Greenwood’s model is based on a number of factors, such as performance over the trailing two-year period, volatility, share turnover, IPO activity and the price path of the trailing two-year runup. For example, he and his fellow researchers found that when an industry beats the market by 150 or more percentage points over a two-year period, there’s an 80% probability that it will crash — which they define as a drop of at least 40% over the subsequent two years. As you can see from the accompanying chart, State Street is reporting low crash probabilities for all sectors — in each case well below the average forecasted crash probabilities of the past five years.

These probabilities don’t mean that stocks will have a great year in 2024. A new bear market could begin this year without the decline satisfying the researchers’ definition of a crash.

Nevertheless, the takeaway from the State Street US Froth Forecasts is that there are bigger things to worry about this year than the possibility of a crash.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Trump says he hopes market crashes in 2024 under Biden: ‘I don’t want to be Herbert Hoover

Also read: Iowa caucuses are make-or-break for Donald Trump

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January 15, 2024
Why the 60-40 portfolio is poised to make a comeback in 2024

Speculation that the 60-40 portfolio may have outlived its usefulness has been rife on Wall Street after two years of lackluster performance.

But as the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
hovers around 4%, some strategists say the case for allocating a healthy portion of one’s portfolio to bonds hasn’t been this compelling in a long time.

And with the Federal Reserve penciling three interest-rate cuts next year, investors who seize the opportunity to buy more bonds at current levels could reap rewards for years to come, as waning inflation helps to normalize the relationship between stocks and bonds, restoring bonds’ status as a helpful portfolio hedge during tumultuous times, market strategists and portfolio managers told MarketWatch.

Add to this is the notion that equity valuations are looking stretched after a stock-market rebound that took many on Wall Street by surprise, and the case for diversification grows even stronger, according to Michael Lebowitz, a portfolio manager at RIA Advisors, who told MarketWatch he has recently increased his allocation to bonds.

“The biggest difference between 2024 and years past is you can earn 4% on a Treasury bond, which isn’t that far off from the projected return in U.S. stocks right now,” Lebowitz said. “We’re adding bonds to our portfolio because we think yields are going to continue to come down over the next three to six months.”

See: Case for traditional 60-40 mix of stocks and bonds strengthens amid higher rates, according to Vanguard’s 2024 outlook

Does 60-40 still make sense?

Since modern portfolio theory was first developed in the early 1950s, the 60-40 portfolio has been a staple of financial advisers’ advice to their clients.

The notion that investors should favor diversified portfolios of stocks and bonds is based on a simple principle: bonds’ steady cash flows and tendency to appreciate when stocks are sliding makes them a useful offset for short-term losses in an equity portfolio, helping to mitigate the risks for investors saving for retirement.

However, market performance since the financial crisis has slowly undermined this notion. The bond-buying programs launched by the Fed and other central banks following the 2008 financial crisis caused bond prices to appreciate, while driving yields to rock-bottom levels, muting total returns relative to stocks.

At the same time, the flood of easy money helped drive a decadelong equity bull market that began in 2009 and didn’t end until the advent of COVID-19 in early 2020, FactSet data show.

More recently, bonds failed to offset losses in stocks in 2022. And in 2023, U.S. equity benchmarks such as the S&P 500
SPX
have still outperformed U.S. bond-market benchmarks, despite bonds offering their most attractive yields in years, according to Dow Jones Market Data.

The Bloomberg U.S. Aggregate Total Return Index
AGG
has returned 4.6% year-to-date, according to Dow Jones data, compared with a more than 25% return for the S&P 500 when dividends are included.

But this could be about to change, according to analysts at Deutsche Bank. The team found that, going back decades, the relationship between stocks and bonds has tended to normalize once inflation has slowed to an annual rate of 3% based on the CPI Index.

DEUTSCHE BANK

The CPI Index for November had core inflation running at 4% year over year, a level it has been stuck at for the past several months. The Fed’s projections have inflation continuing to wane in 2024.

Staff economists at the central bank expect the core PCE Price Index, which the Fed prefers to the CPI gauge, to slow to 2.4% by the end of next year. If that comes to pass, investors should see the inverse relationship between stocks and bonds return, according to Lebowitz and others.

A window of opportunity

The dismal performance of 60-40 portfolios over the past two years has inspired a wave of Wall Street think pieces questioning whether it still makes sense for contemporary investors.

A team of academics led by Aizhan Anarkulova at Emory University in November presented findings showing that over a lifetime, investors would have reaped higher returns via a portfolio consisting of 100% exposure to stocks, split between foreign and domestic markets.

But fixed-income strategists at Deutsche and Goldman Sachs Group, as well as others on Wall Street, say investors wouldn’t be well-served by excluding bonds from their portfolio, particularly with yields at current levels.

Rob Haworth, senior investment strategy director at U.S. Bank’s wealth-management business, says investors now have an opportunity to lock in attractive returns for decades to come, ensuring that the bonds in their portfolios will, at the very least, deliver a steady stream of income that would reduce any losses in stocks or declines in bond prices.

There is, however, one catch: with the Fed expected to cut interest rates, that window could quickly close.

“The problem is, for investors in cash, the Fed’s just told you that is not going to last. I think that means it is time to start thinking about your long-term plan,” Haworth said.

Read: Fed could be the Grinch who ‘stole’ cash earning 5%. What a Powell pivot means for investors.

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December 20, 2023
'Smidcap' companies are becoming a big deal. Here's a look at some of the best.

The stocks of long-neglected small companies are finally showing signs of life as the market rally broadens. But these tiny companies still remain vastly undervalued. So, they are one of the best buys in the stock market right now.

Small- and medium-cap companies, or smidcaps, have not been this cheap since the Great Financial Crisis 15 years ago. “Smidcaps relative to large caps look very attractive,” says says portfolio manager Aram Green, at the ClearBridge Select Fund LBFIX, which specializes in this space. “Over the long term you will be rewarded.”

Green is worth listening to because he is one of the better fund managers in the smidcap arena. ClearBridge Select beats both its midcap growth category and Morningstar U.S. midcap growth index over the past five- and 10 years, says Morningstar Direct. This is no easy feat, in a mutual fund world where so many funds lag their benchmarks.

The timing for smidcap outperformance seems about right, since these stocks do well coming out of recessions. Technically, we have not recently had a recession. But there was an economic slowdown in the first half of the year, and the U.S. did have an earnings recession earlier this year. So that may count.

To get smidcap exposure, consider the funds of outperforming managers like Green, and if you want to throw in some individual stocks, Green is a great guide on how to find the best names in this space.

I recently caught up with him to see what we can learn about analyzing smidcaps. Below are four tactics that contribute to his fund’s outperformance, with nine company examples to consider.

1. Look for an entrepreneurial mindset: Green’s background gives him an edge in investing. He’s an entrepreneur who co-founded a software company called iCollege in 1997. It was bought out by BlackBoard in 2001. He knows how to understand innovative trends, identify a good idea, secure capital and quickly ramp up a business. This experience gives him a “private market mindset” that helps him pick stocks to this day.

“Founder-run companies regularly outperform.”

Green looks for managers with an entrepreneurial mindset. You can glean this from company calls and filings, but it helps a lot to meet management — something most individual investors cannot do. But Green offers a shortcut, one which I regularly use, as well. Look for companies that are run by founders. This will give you exposure to managers with entrepreneurial spirit.

Here, Green cites the marketing software company HubSpot
HUBS,
+0.79%,
a 1.9% fund position as of the end of the third quarter. It was founded by Massachusetts Institute of Technology college buddies Brian Halligan and Dharmesh Shah. They’re on the company’s board, and Shah is chief technology officer.

Academic studies confirm founder-run companies regularly outperform. My guess is this is because many founders never lose the entrepreneurial spirit, no matter how easy it would be to quit and sip Mai Tai’s on a beach after making a bundle.

In the private market, Green cites Databricks, a data management and analytics company with an AI angle. This competitor of Snowflake
SNOW,
-0.92%
is likely to go public in 2024. If you feel like an outsider because you lack access to private market investing, note that Green says he typically buys more exposure to private companies on the initial public offering (IPO), and then in the market. “We like to spend time with them when they are private so we can pounce when they are public,” Green says.

2. Look for organic growth: When companies make acquisitions their stocks often decline, and for good reason. Managers make mistakes in acquisitions because they overestimate “synergies.” Or they get wrapped up in ego-enhancing empire building.

“We favor entrepreneurial management teams that do not make a lot of acquisitions to grow, but use their resources to develop new products to keep extending the runway,” says Green.

Here, he cites ServiceNow
NOW,
+2.62%,
which has grown by “extending the runway” with new offerings developed internally. It started off supporting information technology service desks, and has expanded into operations management of servers and security, onboarding employees, data analytics, and software that powers 911 emergency call systems. Green obviously thinks there is a lot more upside to come, given that this is an overweight position, at 4.6% of the portfolio (the fund’s biggest holding).

Green also puts the “Amazon.com of Latin America” MercadoLibre
MELI,
+0.17%
in this category, because it continues to expand geographically and in areas such as logistics and payment systems. “They have really morphed into a fintech company,” Green says. He puts HubSpot and the marketing software company Klaviyo
KVYO,
-5.73%
in this category, too.

3. Look for differentiated business models: Green likes companies with offerings that are special and different. That means they’ll take market share, and face minimal competition. They’ll also enjoy pricing power. “This leads to high margins. You don’t have someone beating you up on price,” he says.

Green cites the decking company Trex
TREX,
+0.10%,
which offers composite decking and railing made from recycled materials. This gives it an eco-friendly allure. Compared to wood, composite material lasts longer and requires less maintenance. It costs more up front but less over the long term. Says Green: “The alternative decking market has taken about 20% of the market and that can get to 50%.”

Of course, entrepreneurs notice success, and try to imitate it. That’s a risk here. But Trex has an edge in its understanding of how to make the composite material. It has a strong brand. And it is building relationships with big-box retailers Home Depot and Lowe’s. These qualities may keep competitors at bay.

4. Put some ballast in your portfolio: Green likes to keep the fund’s portfolio balanced by sector, size, and business dynamic. So the portfolio includes the food distributor Performance Food Group
PFGC,
-1.69%.
The company is posting mid-single digit sale growth, expanding market share and paying down debt. Energy drinks company Monster
MNST,
-0.85%
also offers ballast. Monster’s popular product line up helps the company to take share and enjoy pricing power, Green says.

It’s admittedly unusual to see a food companies in a portfolio loaded with high-growth tech innovators. But for Green, it’s all part of the game plan. “Rapid growth, disrupting businesses are not going to work year in year out. There are times they fall out of favor, like 2022. So, having that balance is important because it keeps you invested in the equity market.”

In other words, keeping some ballast means you’re less likely to get shaken out by sharp declines in high-growth and high-beta tech innovators when trouble strikes the market.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN, TSLA and MELI. Brush has suggested AMZN, TSLA, NOW, MELI, HD and LOW in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks

More: Nvidia, Disney and Tesla are among 2023’s buzziest stocks. Can they continue to sizzle in 2024?

Also read: Presidential election years like 2024 are usually winners for U.S. stocks

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December 17, 2023
How stock-market investors can ride out a ‘fear cycle’ as S&P 500, Nasdaq fall into correction

Many people like to feel at least a little bit of fright.

That has been the whole point of Halloween for ages. The spooky traditions might even be a sort of hedge, a way to limit carnage should darker days lurk around the corner.

Where it gets trickier is when fear impacts a nest egg, retirement fund or portfolio holdings. And fear of looming mayhem has been higher in October, with a sharp selloff causing the S&P 500 index
SPX
to break below the 4,200 level, landing it in a correction on Friday. It also joined the Nasdaq Composite Index in falling at least 10% from a summer peak.

In addition, a brutal bond-market rout has pushed the 10-year and 30-year Treasury yields
BX:TMUBMUSD10Y
up dramatically, with both recently dancing around the 5% level, which can drive up borrowing costs for the U.S. economy and cause havoc in financial markets.

“Round numbers matter,” said Rich Steinberg, chief market strategist at The Colony Group, which has $20 billion in assets under management. He said the backdrop has investors trying to figure out “where to put money” and wanting to know “where can we hide?”

“When you get into a fear cycle, the dynamics can get out of whack with reality,” Steinberg said. He thinks investors won’t go wrong earning roughly 5.5% on shorter term risk-free Treasurys, while penciling in stock prices they like.

“That’s where investors really get rewarded over the long-term,” he said, granted they have enough liquidity to ride out what could be elongated patches of volatility.

Increasingly, investor worries tie back to U.S. government spending, with the Treasury Department early next expected to release an estimated $1.5 trillion borrowing need to accommodate a large budget deficit. That would unleash even more Treasury supply into an unsettled market, and potentially strain the plumbing of financial markets.

Higher U.S. bond yields threaten to make it more expensive for the federal government to service its debt load, but they also can be prohibitive for companies, sparking layoffs and defaults.

Fed decisions, yields

The Federal Reserve is expected to hold its policy interest rates steady on Wednesday following its two-day meeting, keeping the rate at a 22-year high in the 5.25%-5.5% range.

The real fireworks, however, often appear during Fed Chairman Jerome Powell’s afternoon press conference following each rate decision.

“I firmly believe they are done for good,” said Bryce Doty, a senior portfolio manager at Sit Investment Associates, of Fed hikes in this cycle, which he notes should set up bond funds for a banner 2024, after two rough years, given today’s higher starting yields.

Yet, Doty also sees two “wild cards” that could rattle markets. Heavy Treasury debt issuance could overwhelm liquidity in the marketplace, causing yields to go up higher and potentially force the Fed to restart its bond-buying program, he said.

War abroad also could expand, including with the Israel-Hamas conflict, which could spark a flight to quality and push down U.S. bond yields.

With that backdrop, Doty suggests adding duration in bonds
BX:TMUBMUSD03M
as longer-term yields rise above short-term yields, and the so-called Treasury yield curve gets steeper. “This is the time,” he said. Investors should “keep marching” out on the curve as it steepens.

“Yields, in my mind, have been the main challenge for the equity market,” said Keith Lerner, chief markets strategist at Truist Advisory Services, while noting that stocks have been wobbly since the 10-year Treasury yield topped 4% in July.

Lerner also said the near 17% drop in the powerful “Magnificent Seven” stocks, while notable, isn’t as bad as in some other S&P 500 index sectors, like real estate, were the retrenchment is closer to 20%.

“We’ve had a pretty good reset,” he said, adding that lower stock prices provide investors with “somewhat better compensation” for the uncertainties ahead.

“This is one of the most challenging investment environments we’ve seen in a long time,” said Cameron Brandt, director of research at EPFR, which tracks fund flows across asset classes.

With that backdrop, he expects investors to keep more dry powder on hand through the end of this year than in the past.

The Dow Jones Industrial Average
DJIA
shed 2.1% for the week and closed at its lowest level since the March banking crisis. The S&P 500 lost 2.5% for the week and the Nasdaq Composite fell 2.6% for the week.

Another big item on the calendar for next week, beyond the Treasury borrowing announcement and Fed decision Wednesday is the Labor Department’s October jobs report due Friday.

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October 29, 2023
Here’s the real reason the stock market is so horrid. And, yes, it’s rather spooky.

Some say it’s the fear of stagflation.

Some say it’s chaos on Capitol Hill.

Some say it’s turmoil in the Middle East.

But we all know the real reason the stock market is so crummy, right?

It’s October! Of course stocks are down!

It is a bizarre, inexplicable, and yet undeniable, fact that, throughout history, Wall Street has produced almost all of its gains during the winter months of the year — from Nov. 1 to April 30. It is an even more bizarre, inexplicable and yet undeniable fact that the rest of the world’s stock markets have done the same thing.

The so-called summer months, meaning the half of the year from May 1 to Halloween, have generally given you bupkis or worse.

Around the world, over the course of centuries of recorded financial history, stock-market returns have averaged four full percentage points higher from November to April than from May to October, report researchers Ben Jacobsen at Tilburg University and Cherry Yi Zhang at Nottingham University’s Business School in China. This so-called Halloween Effect seems “remarkably robust,” they concluded, after studying the financial returns of 114 different countries going back as far as they could find reliable monthly data — starting with the stock market in 1693 London.

Even more extreme: In the 65 countries for which they had extensive data both about the stock market and about short-term interest rates, it’s fair to say you would have been better off selling your stocks on May 1, putting the money in the bank, then taking it out again at the end of October and buying back your stocks (ignoring fees and taxes, of course).

“In none of the 65 countries for which we have total returns and short-term interest rates available — with the exception of Mauritius — can we reject a Sell in May effect based on our new test. Only for Mauritius do we find evidence of significantly positive excess returns during summer.”

Italics mine. Mauritius?

The Dow Jones Industrial Average
DJIA
is now lower than it was at the end of April. So is the Russell 2000
RUT
index of small-cap U.S. stocks. The benchmark international stock index, the MSCI EAFE, is down about 6%. Japan’s Nikkei
NIY00,
+1.90%
is slightly up, as the yen has tanked.

The S&P 500
SPX
is hanging on to a small gain, but that is only because of the early summer gains of a few tech titans. The average S&P stock is down about 2.5% since the end of April — while an investment in no-risk Treasury bills is up more than 2%.

Meanwhile, let the record show that, over the same period, according to the record keepers at MSCI, the stock market in Mauritius is up 12%.

Booyah!

Every time I write about this Halloween or “sell in May” effect, I make the same two points, and I make no apologies for repeating them here, because they are unavoidable.

The first is that, every spring, after looking at this data, I am tempted to sell all my stocks at the end of April, and every year I don’t, because I think it’s absolutely ridiculous. (And someone on Wall Street who is much smarter than me usually persuades me not to.) And most years I end up kicking myself for not doing it.

The second is to recall the old economists’ joke: “I don’t care if it works in practice! Does it work in theory?” Selling in May — or, sure, the Halloween Effect — has absolutely no reason that anyone can find for working in theory. But apparently, it works in practice — which is pretty much where we are now.

Does this mean stocks are going to rally? It’s anyone’s guess. It would be crazy if it were that simple. But, then, the whole Halloween Effect is crazy.

If history is any guide, now is the time to buy stocks, not sell them, because the next six months are likely to be the time when they make you money. And if history isn’t any guide, well, aren’t we all sunk anyway?

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October 10, 2023
Why stocks are likely to be especially volatile this October

The U.S. stock market has been volatile in September. Brace yourself for October.

September has the reputation of being the worst month for the stock market, but October far and away is the most volatile month of the year — as you can see from the accompanying chart. So if this October follows the historical averages, the stock market won’t lose as much as it has so far in September but investors will still feel whipped around.

You might think October’s historical volatility can be traced to the U.S. market crashes that occurred in 1929 and 1987, each of which occurred during that month. But you’d be wrong: October remains at the top of the volatility rankings even if those two years are removed from the sample. Nor is there any trend over time in October’s place in those rankings: If we divide the period since the Dow Jones Industrial Average
DJIA
was created in 1896 into two periods, October is the most volatile in both the first and second halves.

Why would October be the most volatile month? I’m not aware of any plausible theory, and that normally would be a reason not to expect the historical pattern to continue. But not in this case.

That’s because an expectation of volatility can itself lead to greater volatility. So the fact that past Octobers have been so volatile is a reason to expect this coming October to also be a particularly choppy month on Wall Street.

If so, our job is not to get spooked by October’s volatility into going to cash. Of course, you may have other reasons why you might want to reduce your equity exposure. But if you were otherwise wanting to be heavily invested in equities, fasten your seat belt and hold on.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Wall Street analysts expect the S&P 500 to rise 19% over the next 12 months. Here are their 10 favorite stocks.

Plus: Let’s debunk the bears’ top arguments against further stock market gains

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September 30, 2023
Fed’s revised dot plot for interest rates makes wall of maturing debt a bigger worry

The Federal Reserve on Wednesday surprised markets with a fortification of its higher-for-longer stance on interest rates, penciling in only half as many rate cuts next year as had been expected.

Fed officials kept the central bank’s policy rate at a 22-year high, but redrew their so-called “dot plot,” a chart of the potential path of short-term rates over time, in a less favorable way for borrowers.

The…

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September 20, 2023
When will inflation cool to the Fed’s 2% target? By late next year, says JP Morgan strategist.

Inflation is likely to fall below the Federal Reserve’s 2% annual target by late next year, according to David Kelly, chief global strategist at JP Morgan Asset Management.

Consumer prices rose again in August to reach a 3.7% yearly rate, based on Wednesday’s release of the monthly consumer-price index. That marked its biggest jump in 14 months and a higher reading than the recent 3% low set in June (see chart) as the toll of the Fed’s rate hikes kicked in.

U.S. consumer prices rose in August, after touching a recent low of 3% yearly in June, as energy prices shot up.

AllianceBernstein

The catalyst for increased price pressures in August was a roughly 30% surge in energy prices
CL00,
+1.32%
this quarter, according to Eric Winograd, director of developed market economic research at AllianceBernstein.

West Texas Intermediate Crude, the U.S. benchmark, settled at $88.52 a barrel on Wednesday, as traders focused on supply concerns following decisions by Saudi Arabia and Russia to cut crude supplies through year-end. WTI was trading at a low for the year below $65 a barrel in May.

“I don’t think that today’s upside surprise is sufficient to trigger a rate hike next week and I continue to expect the Fed to stay on hold,” Winograd said, in emailed commentary. “But with inflation sticky and growth resilient, the committee is likely to maintain a clear tightening bias—the dot plot may even continue to reflect expectations of an additional hike later this year.”

Federal Reserve officials increased the central bank’s policy rate to a 5.25%-5.5% range in July, the highest in 22 years.

Higher gasoline prices, however, also could act as a counterweight to inflation, according to JP Morgan’s Kelly. “Indeed, to the extent that higher gasoline prices cool other consumer spending, the recent energy price surge could contribute to slower growth and lower inflation entering 2024,” Kelly wrote in a Wednesday client note.

“We still believe that, barring some further shock, year-over-year headline consumption deflator inflation will be below the Fed’s 2% target by the fourth quarter of 2024.”

Kelly isn’t expecting the Fed to raise rates again in this cycle.

U.S. stocks ended mixed Wednesday following the CPI update, with the Dow Jones Industrial Average
DJIA
down 0.2%, the S&P 500 index
SPX
up 0.1% and the Nasdaq Composite Index
COMP
up 0.3%, according to FactSet.

But with oil prices well off their lows for 2023, Winograd said further progress on cooling headline inflation is unlikely this year, even though he expects core inflation to gradually decelerate, a process that will “keep the Fed on high alert.”

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September 13, 2023
A recession could be nine months away, according to this telltale gauge

The roughly $25 trillion Treasury market first began flashing this telltale sign that a U.S. recession likely lurks on the horizon almost a year ago, according to Bespoke Investment Group.

It was late October of 2022 when the 3-month Treasury yield BX:TMUBMUSD03M first eclipsed the 10-year Treasury yield BX:TMUBMUSD10Y, resulting in an “inversion” of a key part of the yield curve that’s been a reliable predictor of past recessions.

Where…

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September 6, 2023
As U.S. stock-market investors celebrate soft economic data, is bad news becoming bad news again on Wall Street?

With second-quarter earnings season now largely behind the market, stock investors have been focusing on the latest economic data.

They have, for the most part, been reacting positively to “bad economic news,” or any data that may point to an economic slowdown.

It’s been almost nine months since the trend emerged, as softening economic data and lower inflation may mean the Federal Reserve can stop raising interest rates, said Chris Fasciano, portfolio manager at Commonwealth Financial Network.

Traders in federal-funds futures, as of Friday, are pricing in an over 90% chance that the Fed will hold its policy interest rate unchanged at its September meeting, and a roughly 35% likelihood that the U.S. central bank will raise interest rates by 25 basis points in November.

Read: The Fed’s monetary policy has lost some of its potency and interest rates may need to rise much higher as a result, economist says

U.S. stocks closed the week higher ahead of the Labor Day holiday weekend, after data released Friday indicated a cooling labor market, though there was speculation that a “mirage” concerning the conclusion of summertime jobs may have factored. The U.S. created 187,000 new jobs in August, while the unemployment rate jumped to 3.8% from 3.5%.

The data support the narrative of a gradual slowdown in the labor market, but there are no signs that the economy is weakening significantly, according to Richard Flax, chief investment officer at Moneyfarm.

Also read: ‘Near perfect’ jobs report has traders expecting Fed to be done hiking rates this year

“The economic data has not been bad. It is just softening. If you saw really bad economic data, that wouldn’t be taken particularly positively,” Flax said.

Meanwhile, “what we’re experiencing is a rolling recession,” said Jamie Cox, managing partner at Harris Financial Group. “Recession activity actually goes from sector to sector, but it doesn’t translate into this big broad-based decline.”

However, if investors see a significant decline in the housing and labor markets, that could change the narrative, Cox noted.

Read: Fed rate hikes can end now that U.S. job gains are the size of an economy like Australia’s, says BlackRock

To break the cycle in which bad economic news is good news for stocks, economic data have to be much worse than now, indicating more damage from high interest rates, noted Flax.

The trend may also reverse if there is a “meaningful downgrade” of corporate earnings expectations, said Flax. “I think you need to see it when macro data translates into weakened profitability.”

Investors should also be alert of the possibility that inflation may accelerate again, according to David Merrell, founder and managing member at TBH Advisors.

Data showed that the personal consumption expenditures price index rose a mild 0.2% in July, but the yearly inflation rate crept up to 3.3% from 3%, the government said Thursday.

“Inflation overall has been trending down nicely. But if it starts to kick back up, that could mean bad news becomes bad news now,” said Merrell.

If investors start to treat bad economic news as bad news for the stock market, it could put pressure on the 2023 stock-market rally, with the S&P 500
SPX
up 17.6% since the start of the year and the Nasdaq Composite
COMP
up 34%.

In the past week, the Dow Jones Industrial Average
DJIA
climbed 1.4%, the S&P 500 advanced 2.5% and the Nasdaq gained 3.2%, according to Dow Jones Market Data. The S&P 500 posted its biggest weekly gain since the week ending June 16.

This week, investors will be expecting data on the July U.S. international trade deficit and the ISM services sector activity for August on Tuesday, weekly initial jobless benefit claims data on Thursday, and the July wholesale inventories data on Friday. They will also tune into the speeches of a number of Fed speakers, looking for clues on whether the central bank is ready to be done with its rates hikes.

Economic calendar: On this week’s economic-data docket are the Fed Beige Book, factory orders, unemployment claims and more

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September 3, 2023

August used to be the best month for the stock market. Then it became the worst.

August the best month for average stock market performance? Or is it the worst?

The answer depends on the period of stock-market history you examine. Over the 90 years from the Dow Jones Industrial Average’s
DJIA,
+0.50%
inception in 1896 until 1986, August on average was far ahead of the other months — more than four times larger, as you can see from the table below. August outperformed the other months’ average by 1.4 percentage points. This difference is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.

In the years since then, in contrast, August has been the worst month for the stock market, on average, lagging the other months’ average by 1.7 percentage points. Since 1986, in fact, August has been a worse month for the stock market than even September, whose reputation for stock market losses is widely known.

	August’s average DJIA return	Average return of all other months	August’s rank among all 12 months
1896 to 1986	+1.8%	+0.4%	1^st
After 1986	-0.8%	+0.9%	12^th

If the 36 years since 1986 were all that statisticians had to go on, they would conclude that August’s underperformance was significant at the 95% confidence level — just the opposite of the conclusion that emerges from the 90 years prior. But when analyzing the Dow’s entire history since 1896, August’s performance is no better or worse than average.

This August, in order to use history as a basis for investing, you’d first need to come up with a plausible explanation of what changed in the 1980s that caused August to swing from best to worst.

Though I’m not aware of any such explanation, it’s always possible that one exists. To search for it, I analyzed monthly values back to 1900 for the Economic Policy Uncertainty (EPU) index that was created by Scott Baker of Northwestern University, Nicholas Bloom of Stanford University, and Steven Davis of the University of Chicago. We know from Finance 101 that the stock market responds to changes in economic uncertainty, so we’d be onto a possible explanation of August’s seasonal tendencies if the EPU underwent some fundamental change in 1986.

But no such change shows up in the data. August’s average EPU level is no different than for any of the other months of the calendar, either before or after 1986.

Another possible explanation might trace to investor sentiment. To investigate that possibility, I analyzed stock market timers’ average recommended equity exposure levels, as measured by the Hulbert Stock Newsletter Sentiment Index (HSNSI). I was looking to see if, after 1986, the HSNSI was significantly different at the beginning of August than in other months, on average. The answer is “no.”

A plausible explanation might still exist for August’s change of fortune beginning in the mid-1980s, notwithstanding my inability to find one. But absent such an explanation, the most likely explanation is that it’s a random fluke.

It would hardly be a surprise if randomness is the culprit. Most of the patterns that capture Wall Street’s attention are in fact nothing more than statistical noise. The reason we nevertheless insist that significant patterns exist is because — as numerous psychological studies have shown — we’re hardwired to find patterns even in randomness.

That’s why your default reaction to all alleged patterns, not just those involving August, should be skepticism. The odds are overwhelming that they aren’t genuine. Only if those patterns can survive the scrutiny of a skeptical statistician should you even begin to be interested.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Puzzled by the stock-market surge? Overshoots are the new normal, Bank of America strategist says

Plus: Here’s how long the stock market rally may last

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July 28, 2023

Should Twitter have rejected Musk’s offer and remained publicly traded?

Would Twitter have been better off to remain a public company rather than be taken private by Elon Musk?

We’ll never know for sure, of course. But it’s hard to imagine that it would have performed any worse. Twitter as a private company is hemorrhaging advertisers, and according to a recent Fidelity analysis its market value is down nearly two-thirds from the $44 billion Musk paid for it.

Grading Twitter’s performance as a private company is more than an idle armchair exercise. It goes to the heart of an age-old debate over whether companies can be more profitably managed when private rather than public. The private equity (PE) industry not surprisingly claims that its approach is superior, and much of Wall Street agrees since many PE firms have produced impressive long-term returns.

The industry’s claims are not devoid of dissenters. Consider a recent study from Verdad Capital entitled “Private Equity Operational Improvements.” It was conducted by Minje Kwun of Dartmouth College and Lila Alloula of Yale University.

In order to overcome the otherwise insuperable obstacle of being unable to measure how private companies are performing, the researchers focused on a subset of leveraged buyouts (LBOs) from 1996 to 2021 in which the private equity firms issued public debt. In order to sell debt to the public, of course, the PE firms had to issue financial statements publicly, and that enabled the researchers to analyze the LBOs’ performance after going private, relative to public companies in the same industry sector.

Kwun and Alloula focused on six indicators of financial performance: Revenue growth, EBITDA margin, capital expenditures as a percentage of sales, and the ratios of gross profit to total assets, EBITDA to total assets, and debt to EBITDA. (EBITDA, of course, refers to Earnings Before Interest, Taxes, Depreciation and Amortization.)

Relative to public companies in the same sector over the three years after going private, LBOs on average did not show any operational improvement along these six dimensions. The researchers conclude: “The [private equity] industry mythology of savvy and efficient operators streamlining operations and directing strategy to increase growth just isn’t supported by data.”

Their results are consistent with those of a near-decade ago study by Jonathan Cohn and Lillian Mills of the University of Texas and Erin Towery of the University of Georgia. They used a different technique to access the otherwise inaccessible financial data of newly-private companies: Their tax returns. The professors focused on the operating performance of a sample of companies that had gone private between 1995 and 2007, comparing them to otherwise-similar companies that remained public. On average over the three years after going private, the researchers found, the private companies performed no better than the public ones.

The source of PE’s industry high returns

What, then, is the source of the increased return that the private equity industry often produces? The answer appears to be increased leverage. Leverage increases returns on the upside, even if it magnifies losses on the downside. Leverage has worked to the PE industry’s advantage over the last several decades since public markets have on balance have risen significantly.

Notice that increasing leverage requires no particular management expertise or shrewd strategic planning. In principle it’s no more difficult than you or me purchasing stock on margin.

These studies are not the final word on the subject. Some other studies, using alternate methodologies, have found some operational improvement at companies after being taken private. If different methodologies can reach such different conclusions, however, that would suggest that the benefits of going private are not as obvious and overwhelming as the private equity industry would have us believe.

At a minimum, Kwun and Alloula argue, we should be skeptical “of any claims of operational improvements being a major contributor to PE’s performance relative to public markets.”

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: These 5 fast-growing stocks pay generous dividends you can count on

Also read: Top investment newsletters are down on tech, Tesla and Meta Platforms. Here’s what they like.

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July 14, 2023
America may now be in a youth-cession: Consumers over age 60 are propping up the economy

Is America going into a recession or not? That depends on who you ask—and how old they are.

Consumer households from their 20s to their 50s are now spending sharply less on their credit and debit cards than they were a year ago reports Bank of America, after crunching the numbers on its customers.

At this point it’s mostly those over 60, and…

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June 14, 2023
The 60:40 portfolio is up more than 17%. Why is it doing so much better this year?

“Regression to the mean” is a powerful force in the financial markets, so it was a good bet that the 60:40 portfolio would have a much better year in 2023 than in 2022.

But not as good a year as it has had so far. That’s important to point out, lest retirees start believing that returns like we’re seeing this year are the norm. They’re not.

The 60:40 portfolio, a default option for many retirees and near-retirees, lost 23.4% last year, assuming the 60% equity portion was invested in the Vanguard Total Stock Market ETF
VTI,
+1.65%
and the 40% bond portion in the Vanguard Long-Term Treasury ETF
VGLT,
-0.94%.
That was the worst calendar-year return for the portfolio since the Great Depression.

Through the end of May this year, in contrast, this portfolio rose at an annualized pace of 17.6%. That is more than double the average return since 1793 of 7.7% annualized for an annually rebalanced portfolio (according to data compiled by Edward McQuarrie of Santa Clara University).

Regression to the mean deserves only a minority of the credit for this reversal. That’s because there’s no guarantee that, following a year with as big a loss as 2022’s, the portfolio would produce a gain this year. Strictly speaking, in fact, all that regression to the mean implies for the 60:40 portfolio is that its return this year would be closer to its long-term average than last year’s. A wide range of possible returns are consistent with this implication, of course, including a loss—just so long as that loss is significantly less than 2022’s.

Rather than thanking mean regression, retirees therefore should thank their lucky stars that the 60:40 portfolio’s year-to-date return is coming in at the upper end of this possible range.

But I need not remind you that luck is not a strategy.

It’s also important to remember that regression to the mean cuts both ways. Assuming that the 60:40 portfolio continues performing for all of 2023 at its year-to-date pace, mean regression would imply a smaller return in 2024. That smaller return could still be a gain, of course, but it also could be a loss.

In any case, it’s worth emphasizing that the 60:40 portfolio is a long-term bet, not a market timing tool. As you can see from the accompanying chart, this portfolio’s most recent trailing 20-year annualized return is almost precisely on top of its two-century average of 7.7% annualized. So no regression to the mean is implied when projecting the portfolio’s long-term future return.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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June 2, 2023
What the really rich are doing with their money right now: Goldman Sachs

When it comes to investing, some people don’t think in terms of thousands of dollars, tens of thousands, or even millions.

They think in hundreds of millions, or even billions. They have so much money they actually set up a private company, known as a “family office,” to manage all the loot.

And now Goldman Sachs, one of the bankers to the…

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May 9, 2023
Are U.S. markets open on Good Friday?

The U.S. stock market is closed Friday, April 7, for the Good Friday holiday, but the bond market will be briefly open.

Friday morning has seen the release of the monthly jobs report for March, a key piece of economic data that households, investors and industry leaders will be following for clues to how much further progress the Federal Reserve has been making in its inflation fight.

The…

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April 7, 2023
The stock-market rally survived a confusing week. Here’s what comes next.

Despite a Friday stumble, stocks ended a turbulent week with another round of solid gains, keeping 2023’s young but robust stock-market rally very much alive.

But a cloud of confusion also sets over the market, and it will eventually need to be resolved, strategists said.

Stocks rose early in the week as traders continued to bet that the Federal Reserve won’t follow through on its forecast to push the federal funds rate to a peak above 5% and hold it there, instead looking for cuts by year-end. Fed chief Jerome Powell pushed back against that expectation again on Wednesday, but a nuanced answer to a question about loosening financial conditions and an acknowledgment that the “disinflationary process” had begun convinced traders they remained right about the rate path.

On Friday, however, a blowout January jobs report, with the U.S. economy adding 517,000 jobs and the unemployment rate dropping to 3.4%, its lowest level since 1969, appeared to affirm Powell’s position.

Stocks took a hit, even if they finished off session lows, with the Nasdaq Composite
COMP,
-1.59%
booking a fifth straight weekly gain and the S&P 500
SPX,
-1.04%
achieving back-to-back weekly wins. The Dow Jones Industrial Average
DJIA,
-0.38%
suffered a 0.2% weekly fall.

“It kind of leaves you shaking your head right now, doesn’t it?” asked Jim Baird, chief investment officer at Plante Moran Financial Advisors, in a phone interview.

See: Jobs report tells markets what Fed chairman Powell tried to tell them

Commentary: The blowout jobs report is actually three times stronger than it appears

At some point in the coming months there will need to be “a reconciliation between what the markets think the Fed will do and what Powell says the Fed will do,” Baird said.

The rally could continue for now, Baird said, but he argued it would be wise in the long run to take the Fed at face value. “I think the overall tone of risk taking in the market right now is a little bit too optimistic.”

Money-market traders did react to Friday’s data. Fed funds futures on Friday afternoon reflected a 99.6% probability that the Fed would raise the target rate by 25 basis points to a range of 4.75% to 5% at the conclusion of its next policy meeting, on March 22, up from an 82.7% probability on Thursday, according to the CME FedWatch tool.

For the Fed’s May meeting, the market reflected a 61.3% chance of another quarter-point rise to 5% to 5.25%, the level the Fed has signaled is its expected high-water-mark rate. On Thursday, it saw just a 30% chance of a quarter-point rise in May. But markets still look for a cut by year-end.

Of course, one month’s data do not represent the end of the argument. But unless January’s labor-market strength turns out to be a blip, the hawks on the Fed are likely to dig in and keep rates higher for longer, said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, in a phone interview.

For markets, the lack of a resolution to the long-simmering disconnect with the Fed could lead to a period of consolidation after an admittedly impressive start to 2023, he said.

Indeed, the momentum behind the market’s rally could be set to continue. It’s been led by tech and other growth stocks that were hammered in last year’s market rout. Market watchers detect a sense of “FOMO,” or fear of missing out, is driving what some have termed a tech-stock “meltup.”

See: Tech stock ‘meltup’ puts Nasdaq-100 on verge of exiting bear market

“The impressive equity rally to start the year has caught cautious institutional investors, hedge funds, and strategists off guard. While overbought conditions are obvious, the near-universal level of skepticism among institutions provides a contrarian degree of support for continued strength,” said Mark Hackett, chief of investment research at Nationwide, in a Friday note.

And then there’s earnings season, which has so far seen results from around half of the S&P 500.

Companies through Friday had reported lower earnings for the fourth quarter relative to the end of the previous week and relative to the end of the quarter.

The blended earnings decline (a combination of actual results for companies that have reported and estimated results for companies that have yet to report) for the fourth quarter was 5.3% through Friday, compared with an earnings decline of 5.1% last week and an earnings decline of 3.3% at the end of the fourth quarter, according to FactSet. If earnings come out negative for the quarter, it would be the first year-over-year decline since the third quarter of 2020.

When it comes to earnings, “there’s definitely been a mood of forgiveness in the market,” said BMO’s Ma.

“I think the market just didn’t want to see a disastrous earnings season,” he said, noting expectations remain for weak earnings in the current quarter and next, with bulls looking into the second half of this year and even into 2024 to get on a better footing.

For the market, the main driver will remain data on inflation and wage growth, Ma said.

Mark Hulbert: Are we in a new bull market for stocks?

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February 3, 2023
Genius Group CEO on why his company is fighting back against naked short sellers — and it’s not alone

“It’s like being robbed in a library, but you can’t shout ‘Thief!’ because there are ‘Silence, please’ signs everywhere.”

That’s how Roger Hamilton, chief executive of Genius Group Ltd.
GNS,
+55.02%,
describes the powerlessness he feels as U.S. securities rules prevent him from discussing his company’s share price, even as it comes under attack from a group of naked short sellers.

The Singapore-based education company on Thursday announced it had appointed a former FBI director to lead a task force investigating alleged illegal trading in its stock that it first addressed in early January.

For context: Genius Group stock rallies more than 200% after it appoints former F.B.I. director to investigate alleged naked short selling

The news sent the stock up a record 290% on Thursday, and it climbed another 59% on Friday. Volume of about 270 million shares traded in Thursday’s session crushed the daily average of about 634,000 — another indicator, Hamilton told MarketWatch in an interview Friday, of wrongdoing, given that the company’s float is just 10.9 million shares. “Clearly, that’s far more shares than we created,” he said.

Genius Group has evidence from Warshaw Burstein LLP and Christian Levine Law Group, with tracking from Share Intel, that certain individuals and/or companies sold but failed to deliver a “significant” amount of its shares as part of a scheme seeking to artificially depress the stock price.

The company is now exploring legal action and is planning an extraordinary general meeting in the coming weeks to get shareholder approval for its planned actions. These include paying a special dividend as a way to flush out bad actors and working with regulators to share information.

Share Intel uses tracking software in real time to determine exactly where there are discrepancies in the market and where brokers are opening large positions, Hamilton said. The software can measure the number of shares that are being naked shorted and has found multiple instances where significant amounts of fake shares were being created, said Hamilton.

Naked short selling is illegal under Securities and Exchange Commission rules, but that hasn’t stopped the practice, which Hamilton said affects far more companies than is generally known.

In regular short trading, an investor borrows shares from someone else, then sells them and waits for the stock price to fall. When that happens the shares are bought cheaper and returned to the prior owner, with the short seller pocketing the difference as profit.

In naked short selling, investors don’t bother borrowing the stock first and simply sell shares with a promise to deliver them at a later date. When that promise is not fulfilled, it’s known as failure to deliver.

By repeating that process again and again, bad actors can generate massive profits and manipulate a stock’s price lower, with an ultimate goal of driving a company to bankruptcy, at which point all the equity is wiped out and the naked shorts no longer need to be covered.

Hamilton said the evidence gathered by Genius Group shows a great deal of the illegal activity is happening on U.S. exchanges, but there’s also activity happening off-exchange and involving dark pools.

The company is fighting back “because we want this to stop,” Hamilton told MarketWatch. “They’re taking value away from our shareholders. They’re predators. They’re doing something illegal, and we want it to stop, whether that means getting regulators to enforce existing regulations or put new ones in place.”

Public companies have to have committees to monitor and report internal fraud to protect shareholders, he said. But there is no such team looking for external fraud and many retail investors see stocks being manipulated, he said.

“Hopefully, regulations will change and regulators will see there are as many, if not more, threats from outside a company,” he said.

Genius Group is not alone, said Hamilton. He cited among other examples Torchlight, an oil- and gas-exploration company that decided to merge with Metamaterial Inc. to thwart a naked-short-selling attack.

The stock rose from 30 cents to $11 in the six months after the deal was completed, and the company was able to raise about $183 million through a combination of convertible debt and equity. An interview Hamilton conducted with Torchlight’s former CEO, John Brda, can be found below.

Then there’s Jeremy Frommer, CEO of Creatd Inc.
CRTD,
+4.14%,
which aims to unlock creativity for creators, brands and consumers, who is behind Ceobloc, a website that aims to end the practice of naked short selling.

“Illegal naked short selling is the biggest risk to the health of today’s public markets,” is how the site introduces its mission.

On Friday, the stock of Helbiz Inc.
HLBZ,
+65.48%
joined Genius Group in rocketing higher in high volume, after that company said it, too, was taking on naked short sellers.

The New York–based maker of e-scooters and e-bicyles said that it was following Genius Group’s example and that it believes “certain individuals and/or companies may have engaged in illegal short selling practices that have artificially depressed the stock price.” The stock had plummeted 64% over the three months through Thursday’s close at 12.31 cents.

Genius Group’s stock, which went public in April 2022 at $6 a share, has gained more than 600% this week. The S&P 500
SPX,
+1.89%
has gained 1.1% over the same four trading sessions.

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January 20, 2023
Investors may be whistling past the graveyard of a recession with latest rally in stocks

Investors feeling giddy about last week’s sharp rally for stocks might want to give a listen to Tom Waits’ song, “Whistlin’ Past the Graveyard” from 1978, to sober up for the dangers that still lurk ahead.

The surge in stocks catapulted the S&P 500 index
SPX,
+0.92%
almost back to the 4,000 mark on Friday, also lifting it to the biggest weekly gain in roughly five months, according to Dow Jones Market Data.

Investors showed courage on signs of a slight slowing of inflation, but the fortitude also comes as a drearier backdrop for investors has been unfolding in plain sight. Massive layoffs at big technology companies, the dramatic implosion of crypto-exchange FTX, and the day-to-day pain of high inflation and skyrocketing borrowing on businesses and households are all taking a toll.

“We are not convinced this is the beginning of a new bull market,” said Sam Stovall, chief investment strategist at CRFA Research. “We believe that we are headed for recession. That has not been factored into earnings estimates and, therefore, share prices.”

Stovall also said the stock market has yet to see the “traditional shakeout of confidence capitulation that we typically see that marks the end of the bear markets.”

From Meta Platforms Inc.
META,
+1.03%
to Lyft Inc.
LYFT,
+12.59%
to Netflix Inc.
NFLX,
+5.51%
there is a wave of major technology companies resorting to layoffs this fall, a threat that could sweep other sectors of the economy if a recession materializes.

Yet, information technology stocks in the S&P 500 jumped 10% for the week, while financials, which stand to benefit from higher interest rates, rose 5.7%, according to FactSet.

That could reflect optimism about the odds of a slower pace of Federal Reserve rate hikes in the months ahead, after sharp rate rises helped to undermine valuations and pull tech stocks dramatically lower in the past year. However, Loretta Mester, president of the Cleveland Fed, and other Fed officials since the October inflation reading on Thursday have reiterated the need to keep rates high, until 7.7% annual rate finds a clearer path to the central bank’s 2% target.

The stock-market rally also might suggest that investors view continued mayhem in the crypto sector as contained, despite bitcoin
BTCUSD,
+0.42%
trading near its lowest level in two years and the shocking collapse in recent days of FTX, once the world’s third-largest cryptocurrency exchange.

Read: FTX’s fall: ‘This is the worst’ moment for crypto this year. Here’s what you should know.

What happens to stocks in recessions

Blows to the American economy rarely have been good for stocks. A look at seven past recessions, starting in 1969, shows declines for the S&P 500 as more typical than gains, with its most violent drop occurring in the 2007-2009 recession.

The more than 37% drop of the S&P 500 from 2007 to 2009 was the worst of its kind in a recession since the late 1960s.

Refinitiv data, London Stock Exchange Group

While a looming U.S. recession isn’t a foregone conclusion, CEOs of America’s biggest banks have been warning about the risks for months. JP Morgan Chase’s Jamie Dimon said in October that a “tough recession” could drag the S&P 500 down another 20%, even though he also said consumers were doing fine, for now.

Still, the steady stream of warnings about the recession odds have left many Americans confused and wondering if one can even happen without an increase in job losses.

Big moves lately in stocks also have been hard to decode, given the economy was shocked back to life in the pandemic by trillions of dollars in fiscal stimulus and easy-money policies from the Fed that are now being reversed.

“What I think goes unnoticed, certainly by the average person, is that these moves are not normal,” said Thomas Martin, senior portfolio manager at Globalt Investments, about stock swings this week.

“It’s all about who is positioned how — and for what — and how much leverage they’re employing,” Martin told MarketWatch. “You get these outsized moves when people are offside.”

Here’s a view of the sharp trajectory upward of the S&P 500 since 2010, but also its dramatic drop this year.

Sharp rise of S&P 500 since 2010, but recent fall

Refinitiv Datastream

While Martin isn’t ruling out the potential for a seasonal “Santa Claus” rally heading into year-end, he worries about a potential leg lower for stocks next year, particularly with the Fed likely to keep interest rates high.

“Certainly what’s being priced in now is either no recession or a very, very mild recession,” he said .

However, Kristina Hooper, Invesco’s chief global market strategist, said the overarching story might be one of stocks sniffing out the first steps in a path to economic recovery, and the Fed potentially stopping its rate hikes at a lower “terminal” rate than expected.

The Fed increased its benchmark interest rate to a 3.75% to 4% range in November, the highest in 15 years, but also has signaled it could top out near 4.5% to 4.75%.

“If often happens that you can see stocks do well, in a less-than-good economic environment,” she said.

The S&P 500 rose 4.2% for the week, while the Dow Jones Industrial Average
DJIA,
+0.10%
gained 5.9%, posting its best weekly gain since late June, according to Dow Jones Market Data. The Nasdaq Composite Index shot up 8.1% for the week, its best weekly stretch in seven months.

In U.S. economic data, investors will get an update on household debt on Tuesday, retail sales and homebuilder data on Wednesday, followed by jobless claims and housing starts data Thursday. Friday brings existing home sales.

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November 12, 2022